I was in Washington recently, giving a talk to the National Association of Business Economists. The subject was the Trans-Pacific Partnership.
Not to keep you in suspense, but I’m thumbs down. I don’t think the proposal is likely to be the terrible, worker-destroying pact that some progressives assert, but it doesn’t look like a good thing for the world, or for the United States – and you have to wonder why the Obama administration would consider devoting any political capital to getting the deal through.
I was glad to see Larry Summers, the former Treasury secretary, weigh in on the same subject earlier this month in an op-ed for The Financial Times. Reading his piece, you may wonder: Did Mr. Summers just come out for the deal or against it? The answer, I think is that he basically supports an idealized version of the T.P.P. that doesn’t exist, and is against the T.P.P. that actually seems to be on the table. And that means that he and I are in a similar place.
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So, about the deal. The first thing you need to know is that almost everyone exaggerates the importance of trade policy. In part, I believe, this reflects “globaloney”: Talking about international trade sounds glamorous and forward-thinking, so everyone wants to make it the centerpiece of their remarks.
Also, there’s an odd dynamic involving the role of international trade in the history of economics. Comparative advantage was an early, classic example of how economic reasoning can lead to results that are correct but not obvious; naturally, economists have always wanted this intellectual victory to be important in the real world, too. This has led to a peculiar dynamic: Comparative advantage says, “yay free trade!,” but also suggests that once trade is already fairly open, the gains from opening it further are small. But because economists want to keep shouting, “yay free trade!,” they look for reasons that those gains might be larger, even though the stories they end up telling are inconsistent with the competitive model that was the basis for their free trade advocacy in the first place.
One particular misuse of the yay-free-trade sentiment is the persistent effort to make protectionism a cause of economic slumps, and trade liberalization a route to recovery. How many times have you seen the Kindleberger “spiderweb” chart showing declining world trade in the early years of the Great Depression, which is then invoked as showing the evils of protectionism (see Slide 2 of my talk)? In fact, it shows no such thing.
The fact is that today trade is fairly free, and estimates of the costs of protectionism from standard models suggest that these costs are quite small. Trade restrictions just aren’t a major drag on the world economy these days, so the gains from liberalization must be slight.
What about the T.P.P.? There are still important barriers in agriculture, but the deal’s advocates are pinning most of their case on services, where we’re talking about more diffuse access issues. So how much could it be worth to break down some of those barriers? I’ve estimated that “hyperglobalization” – the expansion of world trade to unprecedented levels since 1990 – has added about 5 percent to world incomes.
That’s a combination of everything: containerization, drastic trade liberalization in developing countries, the Internet. A better model might be Europe’s Single Market Act, which the European Commission now estimates added 1.8 percent to real incomes.
And Europe, which has a compact geography and the kind of shared institutions and culture (as well as transparency) that make increased access achievable, is surely a better case than the diverse, sprawling group of countries involved in the T.P.P. I’d argue that it’s implausible to claim that the T.P.P. could add more than a fraction of 1 percent to the incomes of the nations involved.
These gains aren’t nothing, but we’re not talking about a world-shaking deal here.
So why do some parties want this treaty so much? Because as with many “trade” deals in recent years, the intellectual property aspects are more important than the trade aspects. Leaked documents suggest that the United States is trying to secure radically enhanced protections for patents and copyrights; this is largely about appeasing Hollywood and pharmaceutical companies, not conventional exporters. What do we think about that?
Well, we should never forget that protecting intellectual property means creating a monopoly – letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has zero social marginal cost. In that direct sense, this introduces a distortion that makes the world a bit poorer.
There is, of course, an offset in the form of an increased incentive to create knowledge, which is why we have patents and copyrights in the first place. But do we really think that inadequate incentives to create new drugs or new movies are a major problem right now?
You might argue that there is an interest in enhancing intellectual property protection even if it’s not good for the entire world, because in many cases it’s American corporations that hold the property rights. But are they really American firms in any meaningful sense? If big pharma gets to charge more for drugs in developing countries, do the benefits flow back to American workers? Probably not.
Which brings me to my last point: Why, exactly, should the Obama administration spend any political capital on this deal?